On Jan. 27, the Centers for Medicare and Medicaid Services
(CMS)
published the much-anticipated proposed Average Manufacturing Price (AMP) rule
for implementing the Medicaid prescription drug provisions of the
Patient
Protection and Affordable Care Act (PPACA). The new guidelines will have a
wide-reaching financial impact on the life-science industry by
creating serious
administrative and operational challenges that will have to be addressed
relatively quickly.

The proposed rule aims to lower costs for states and
taxpayers by aligning reimbursement rates to better reflect the actual price
the
pharmacy pays for the drug; increasing rebates paid by drug manufacturers
that participate in Medicaid; and providing rebates for drugs dispensed to
individuals enrolled in a Medicaid managed-care organization.

History of
the
Medicaid Rebate Act

In 1990, Congress passed the Medicaid Rebate Act in
response
to increasing Medicaid expenditures for prescription drugs. The legislation's
goal was to stop drug companies from overcharging Medicaid by
giving taxpayers
(who fund Medicaid) the best discounts that other purchasers negotiated.

The
mechanism Congress designed to achieve this goal
requires drug companies that seek Medicaid payments for their prescription
drugs to pay a rebate to
each state each quarter that is based on the difference
between the price that the state paid and any lower price paid by other
purchasers, other than
health maintenance organizations (HMOs) or government
entities, known as the Best Price (BP), or a rebate based upon a 23.1 percent
discount off the
AMP, whichever provides the greatest rebates to the states.
According to pharmaceutical pricing data, the overwhelming majority of
manufacturer drug
rebates are BP-based, not the flat 23.1-percent rebate.

The Best Price rule
process

The rebates are based upon quarterly price reports the drug
companies submit to CMS. Using these price reports and the states' prescription
drug-use data, CMS calculates the rebates owed by the drug companies to
each state.
Not surprisingly, the Office of the Inspector General (OIG) has recognized
that, "manufacturers have a strong financial incentive to hide
de-facto pricing concessions to other
purchasers to avoid passing on the same discounts to the states" in the form of
higher rebates based on
a BP that would otherwise have included these
discounts.

The process of determining BP involves
scrutinizing all
supply chain and financial transactions for those that yield the lowest net
price. This includes direct sales, indirect sale
chargebacks, wholesaler
rebates, managed-care rebates and any other pertinent price concession.
Transaction attributes, transaction type, entity class
of trade, pricing
arrangements, bundling, contingent-free goods and discounts are the foundation of
transaction selection logic, and form the basis for
the OIG investigation
scrutiny.

BP litigation

The landscape is littered with significant BP offenses and
subsequent large fines and sanctions applied to major
pharmaceutical
manufacturers by the OIG. The details for the offences include typically
fraudulent price reporting based on omitting certain BP setting
transactions.
The offenses are recognized through "whistle-blowing" activities from internal
and external sources and OIG increased investigative
diligence. Representative
offenses follow:

Federal investigators
claim that, between 2000
and 2006, a major pharmaceutical manufacturer
offered steep discounts to thousands of hospitals nationwide for a drug
under a pricing
arrangement known as the "Performance Agreement." The
arrangement required that hospitals purchase the drugs together under a
bundled
arrangement in exchange for a steep discount. Investigators say
that the manufacturer did this to access the lucrative retail outpatient
market, intending that patients who used the intravenous version of the
drug in the hospital would later purchase the oral form once they were
discharged.

Under the performance agreement,
hospitals that placed both products on their formularies and
attained
certain market share requirements were entitled to up to a 94-percent
discount off the list price of the oral form, and up to 80
percent off the
list price of the intravenous form. Although the manufacturer was required
to pass along the benefit of the lowest prices to
the state Medicaid
programs, they didn't—and therefore avoided paying hundreds of millions of
dollars to Medicaid in quarterly rebates,
investigators allege. The
company has now paid more than $2 billion dollars to settle fraudulent
reporting cases involving drug efficacy and
false AMP and BP reporting.

A top-10 pharmaceutical
manufacturer paid $400 million in National Medicaid fraud
settled in 2006.
Even though the Medicaid Rebate Act requires BP reporting to include cash
discounts, free goods contingent on other purchase
requirements, volume
discounts and any other rebates, BP reporting does not include discounts
that are "merely nominal" in amount. The
manufacturer thus devised a
"nominal price" discount to market its products to hospitals, a discount
the hospitals qualified for so long as
they purchased set amounts. The
company excluded these large discounts of more than 90 percent of AMP from
its BP reporting, claiming that so
long as the discount resulted in a
price of less than 10 percent of AMP, as CMS defined the nominal price,
the discount could be excluded
from BP reporting. However, the legislative
history of the Medicaid Rebate Act indicates that nominal price exclusion
to BP reporting was
intended to protect special purchasers, such as
penny-a-pack birth control pills sold to Planned Parenthood. Congress was
also clear that the
overarching purpose of the Medicaid Rebate Act was to
put Medicaid (the states and the taxpayers) on par with all other
commercial
purchasers, such as hospitals. The Deficit Reduction Act of
2005 further delineated the nominal price exclusion, and as of Jan. 1,
2007, only
certain sales for less than 10 percent of AMP qualify.

A major pharmaceutical
manufacturer paid $255 million
under the False Claims Act. In August 2006,
the manufacturer agreed to pay a total of $435 million to resolve criminal
charges and civil
liabilities in connection with illegal sales and
marketing programs for its drugs for use in the treatment of brain tumors
and metastases,
and for use in treatment of superficial bladder cancer and
hepatitis C. The settlement also involved claims involving best price
violations
for other drugs used in treating stomach ulcers.

What the proposed AMP
rule means to you

With such aggressive goals from CMS, manufacturers should
focus on some of the major items included in the rule that will fundamentally change
the way they do business:

Would include U. S.
territories in the AMP calculations.

Rebate agreements would
include prescriptions paid by Medicaid managed care, as well as fee-for-service.
This would require Medicaid
managed-care plans to capture utilization data
and provide it to the states, and would only exempt prescriptions
dispensed by an HMO.

Over-the-counter drugs
would need to be considered covered drugs if they have a National Drug
Code (NDC).

Would prohibit the
inclusion of sales to wholesalers in AMP, unless a manufacturer has
documented evidence that the drugs sold to the
wholesalers were
distributed to retail community pharmacies.

Would include specialty
pharmacies and home healthcare
distributors within the definition of
"retail community pharmacies."

Would require
manufacturers to exclude from
AMP rebates paid to insurers, but not the
underlying sales to the pharmacies.

Would redefine BP to
include discounts and
rebates "associated" with the sale of a drug to a
customer, rather than the price available to that customer.

Would require
inclusion of
direct sales of an AG-labeled drug to a manufacturer or distributor
selling under its own NDC in the AMP of the brand.

CMS is allowing stakeholders to
submit public comments for
60 days from the publication date on the proposed rule. It is expected that CMS
will issue the final rule in October,
although as we learned with the recent
situation concerning the Federal Sunshine Act guidelines, there is always a chance
of a delay.

In order to benefit from situations such as this,
manufacturers should not only continue to place focus on
preparing to comply
with changing federal legislations, such as the proposed AMP rule, but also
consider how the process of compliance can best be
leveraged to optimize their
business. Because legislative and regulatory change entails reductions in
reimbursement and margins, manufacturers will now
need to leverage their
compliance infrastructure to maintain sales volume, profitability and
competitive advantage. Doing so provides for the
manufacturer additional
efficiencies in data-driven analytics to enable better real-time quantitative
decision-making.

Tony Chen is the
associate director of
government pricing and Chester Schwartz is a senior
consultant at Alliance Life Sciences Consulting Group Inc., a management and
technology consultancy
firm that works with many life-science clients to
define, deploy and support business applications.